The attached note looks the Australian Government’s Economic and Fiscal Update.
The key points are as follows:
- The Government expects the federal budget deficit to peak at a record $184.5bn this financial year. That’s around 9.7% of GDP, its highest since the end of WW2.
- Ultimately, we expect it to be around $220bn this financial year as the Government unveils more stimulus and revenue recovers more slowly than projected by the Government.
- The budget and associated debt blowout is unlikely to cause a major problem as Australian public debt is relatively low, borrowing costs are very low, the Government is borrowing in Australian dollars & it’s not dependent on foreign capital. Letting the budget deficit rise is the right thing to do in order to support the economy through this (hopefully) once in a century pandemic.
This economic and fiscal update is the first since December’s Mid-Year Economic and Fiscal Outlook when budget surpluses looked just around the corner. Since then things have changed dramatically due to the hit from coronavirus and necessary support measures from the Government.
The statement provided no new policy stimulus measures beyond those that have been announced in the last two weeks:
- $2bn in spending on subsidies for apprentices & JobTrainer;
- An estimated $16bn to extend JobKeeper to March next year but with payments stepping down to $1200 and then $1000 a fortnight for those who worked 20 hours or more per week in February and to $750 and then $650 for others and businesses having to meet the turnover reduction test at the end of the September and December quarters to keep receiving it; and
- An estimated $3.8bn to extend the JobSeeker Supplement to December at the pared back rate of $250 a fortnight.
This additional $22bn in spending along with prior coronavirus-related economic support (in the form of actual spending, tax breaks and health measures) takes the COVID-19 response package to nearly $174bn. JobKeeper is the main element in this, but it also includes the JobSeeker supplement, payments to businesses and payments to eligible households. There is also loans & guarantee support (from the government and RBA) worth $125bn or just over 6% of GDP.
Proposals to bring forward the tax cuts and provide additional investment incentives look to have been pushed out to the October budget and additional industry support packages are also likely. The Government may have delayed this extra stimulus to gauge how much additional help will be required with a lot riding on how quickly the latest outbreak of coronavirus is brought back under control. Spreading out the announcement of new stimulus measures may also get more bang for the buck in terms of the boost to confidence.
The Government is forecasting the economy to contract this financial year by -2.5%, its biggest financial year contraction since 1946-47. But this masks a “record” -7% contraction in June quarter GDP and a gradual recovery from the second half of this year. The Government is a bit more optimistic than we are in terms of economic growth and unemployment.
Source: Australian Treasury, AMP Capital